March 6, 2016

Argentina, Latin America’s third largest
power market with approximately 32,000
megawatts (MW) of installed capacity, faces the task of installing 7,000 MW,
or 22.5 percent of its 2015 total capacity, in five years.

With the majority of Argentina’s current
generation needs being met by costly imported fossil fuels, the nation has the
economic incentive to begin exploiting its abundant renewable energy resources.
In 2015 this incentive translated into a new renewable energy law mandating
that eight
percent of generation derive from renewable sources by 2018 and 20
percent by 2026. Whether Argentina’s business leaders and policymakers will
maximize the nation’s abundant renewable energy potential and new pro-business
executive branch policies to create investor confidence, bankable power
purchase agreements (PPAs) and significant renewable production remains to be
seen.

Driven by the need to wean itself off of
expensive imported fuel, renewable portfolio standards (RPS) to achieve eight
percent renewable energy generation as a percent of national consumption were
originally established in 2006. Renewable energy promotion through legislation,
however, dates back to 1998, with the establishment of feed in tariffs, which
allow customers to generate their own electricity using renewable technology
and sell the electricity back to the grid.

Yet these and other similar initiatives
have failed, partially as a result of market distortions including electricity
price freezes and subsidies, which translated into 2014 residential electric
rates of approximately 1.1
cents per kWh (kilowatt hour) for subsidized users for clients of
Edenor, the nation’s largest distribution utility. The same year, Edenor’s
non-subsidized residential customers were subject to a tariff of 6.3 cents per
kWh; compared to international standards, Argentina’s residential ratepayers
have enjoyed some of the lowest rates globally (in 2014 residential electric
tariffs were 18.7 cent per kWh in neighboring Brazil and 12.5
cent per kWh in the United States).

Artificial residential rates that
represent just a fraction of the real cost of electricity have helped reduce
the incentive for residential users to shift to distributed generation,
limiting the likelihood of achieving the nation’s RPS.

Currency controls, including repatriation
limits, have also discouraged foreign direct investment, further diminishing
the prospect of reaching the RPS defined in legislation. Accordingly, in 2015,
just one percent of electric generation derived from wind and solar combined,
while thermal, hydro and nuclear accounted for 63 percent, 30 percent, and six
percent, respectively.

However, improvements to the renewable
energy law, coupled with executive branch policy under the recently installed
Mauricio Macri Administration, may provide Argentina with the momentum to
achieve its renewable energy potential. Argentina’s 2015 Decreto Reglamentario
de la Ley 27.191 strengthens prior legislation through tax exemptions and other
mechanisms, yet the law includes two new renewable promotion schemes with the
most potential for impact: a new renewable energy fund which will support PPAs,
and renewable energy requirements for large energy users.

The nation’s new renewable energy fund,
FODER (Fondo para el Desarrollo de Energías Renovables), will support renewable
energy projects through financing programs, including awarding loans and
capital. More importantly, it will underwrite long term contracts by cosigning
or providing guarantees for PPAs. The National Treasury will provide resources
for the fund, which will equal at least 50 percent of cash savings offered by
replacing fossil fuel generation with less costly renewable generation. To a
lesser extent, demand charges and interest payments on loans will also help
feed FODER and support renewable energy development.

Large users will also be subject to a new
renewable energy requirement. Users with demand exceeding 300 kW will be
required to meet an escalating proportion of their total consumption with
renewable energy, which can be self-supplied, or purchased from a distributor,
retailer or directly from the wholesale market at a price ceiling of $113 USD
per megawatt hour (MWh).

Noncompliance will result in compensation
at a price equivalent to the variable cost of production of imported fuel,
which will be calculated using the weighted average of the imported fuel price
during 12 months prior to noncompliance. This price should be higher than the
MWh price of renewable energy purchases, so large users will have an economic
incentive to comply.

Combined with new executive branch policy,
the renewable energy law may prove far more impactful than past efforts to
drive renewable development in Argentina.

Macri has already removed capital controls
that have limited foreign investment. Under Cristina Kirchner, Argentina’s
president from 2007 to 2015, foreign companies were limited in their ability to
repatriate revenues, and were required to secure permission from Argentina’s
Central Bank to convert argentine pesos to U.S. dollars or other currencies. Lack of access to
dollars delayed payment to suppliers, and caused some companies to
reassess the viability of new investments in Argentina.

Partially as a result
of lifting such controls, Macri expects Argentina to receive $20
billion USD of foreign investment in 2016, which would represent more
than a 200
percent increase from 2014, and include renewable energy projects.

In addition, Macri’s recent decision to
reduce electricity subsidies will further support renewable energy investment
by increasing the $/kWh residential rate. Power prices that more accurately
reflect real costs, as opposed to artificially low costs facilitate renewables’
capacity to compete and provide momentum for distributed generation.

For Argentina, electric generation is at a
crossroads. Electricity demand, which has
doubled on a per capita basis since 1990 and increased at a five percent
annual rate for residential customers in the same period, is projected to
continue to grow at a strong pace and necessitates a 7,000 MW of new generation
capacity by 2021 to ensure reliability. The new 2015 legislation is designed to
guarantee that renewable energy makes a significant contribution to new
generating capacity. As such, the nation must promptly prove itself a viable
option for renewable investment, a task it has not yet achieved.